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Before
the United States House of Representatives, Committee on Financial Services,
Monetary Policy and the State of the Economy, March 2, 2011
Mr.
Chairman,
Every
day we hear stories about rising prices. Whether it be food, gasoline, or
clothing, the cost of living is going up, and not just for Americans, but for
people around the globe. The Federal Reserve's program of quantitative easing
has taken some of the blame for this, and rightly so in my opinion. This
program, known as QE2, sought to purchase a total of $900 billion in US
Treasury debt over a period of 8 months. Roughly $110 billion of newly
created money is flooding into markets each month, markets which are still
gun-shy after the events of the last few years. Banks still hold
underperforming mortgage-backed securities on their books, and are hesitant
to loan out further money, holding well over a trillion dollars on reserve
with the Fed. Is it any wonder, then, that this new hot money is flowing into
commodities around the world?
Cotton
is up over 170% over the past year, oil is up over 40%, and certain
categories of food staples are seeing double-digit price growth. Yet while
the Fed takes credit for the increase in the stock market, it claims no
responsibility for the increases in food and commodity prices. What is always
lost on economists is that inflation is at root a monetary phenomenon. As the
money supply increases, more money chases the same amount of goods, and
prices rise. There may be other factors that contribute to price rises, such
as famine, flooding, or global unrest, but these effects on prices are always
short-term, not long-term. Consistently citing rising demand or bad weather
while ignoring monetary policy is a cop-out. Governments throughout history
have sought to blame price increases on bad weather, speculators, and a whole
host of other factors, rather than acknowledging the effects of their
inflationary monetary policies.
We
must also remember that those policymakers who exercise the most power over
the economy are also the least likely to understand the effects of their
policies. Chairman Bernanke and the other members of the Federal Open Market
Committee were convinced in mid-2008 that the economy would rebound and
continue to grow through 2009, even though it was clear to many observers
that we were in the midst of a severe economic crisis.
These
policymakers are also the last to feel the effects of inflation, in fact,
they benefit from it. Inflation, that is an increase in the money supply,
results in a rise in prices, but those who use this new money first, such as
government employees, contractors, and bankers are able to use this new money
before prices begin to increase, while those further down the totem pole have
already had to deal with price increases before they see any of this new
money.
For
too long the Federal Reserve's monetary policy has led to higher prices and a
decreased purchasing power of the dollar. It is well overdue that this
Committee exercise increased oversight and scrutiny of the Fed's actions, and
I look forward to further Committee action to rein in the Fed.
Ron Paul
www.house.gov/paul
Copyright Dr. Ron
Paul
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